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Executives

David R. Radulski - Senior Vice President and Director of Investor Relations

Michael S. McGavick - Chief Executive Officer and Director

Peter R. Porrino - Chief Financial Officer and Executive Vice President

Gregory S. Hendrick - Chief Executive of Insurance Segment

James Veghte - Chief Executive of Reinsurance Operations and Executive Vice President

Stephen Robb - Senior Vice President and Corporate Controller

Analysts

Keith F. Walsh - Citigroup Inc, Research Division

Jay Gelb - Barclays Capital, Research Division

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Brian Meredith - UBS Investment Bank, Research Division

Gregory Locraft - Morgan Stanley, Research Division

Vinay Misquith - Evercore Partners Inc., Research Division

Joshua D. Shanker - Deutsche Bank AG, Research Division

Matthew G. Heimermann - JP Morgan Chase & Co, Research Division

Doug Mewhirter - RBC Capital Markets, LLC, Research Division

Josh Stirling - Sanford C. Bernstein & Co., LLC., Research Division

Randy Binner - FBR Capital Markets & Co., Research Division

Meyer Shields - Stifel, Nicolaus & Co., Inc., Research Division

XL Group (XL) Q1 2012 Earnings Call May 8, 2012 5:00 PM ET

Operator

Good afternoon. My name is Shirley, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the XL Group plc First Quarter 2012 Earnings Call. [Operator Instructions] Please be advised, this conference is being recorded. I would now like to turn the call over to David Radulski, XL's Director of Investor Relations. Please go ahead.

David R. Radulski

Thank you, Shirley, and welcome to XL Group's first quarter 2012 earnings conference call. This call is being simultaneously webcast on XL's website at www.xlgroup.com. We posted to our website several documents, including our quarterly financial supplement. On our call today, Mike McGavick, XL Group's CEO, will offer opening remarks. Pete Porrino, XL's Chief Financial Officer, will review our Financial Results; followed by Greg Hendrick, our Chief Executive of Insurance Operations; and Jamie Veghte, our Chief Executive of Reinsurance Operations, will review the segment results and market conditions. Then we'll open up for questions.

Also in attendance are Susan Cross, our Global Chief Actuary; Sarah Street, our Chief Investment Officer; and Steve Robb, our Controller.

Before they begin, I’d like to remind you that certain matters we'll discuss today are forward-looking statements. These statements are based on current plans, estimates and expectations. Forward-looking statements involve inherent risks and uncertainties, and a number of factors could cause actual results to differ materially from those contained in the forward-looking statements, and therefore, you should not place undue reliance on them.

Forward-looking statements are sensitive to many factors, including those identified in our annual report on Form 10-K, our quarterly reports on Form 10-Q and other documents on file with the SEC, that could cause actual results to differ materially from those contained in the forward-looking statements. Forward-looking statements speak only as of the date of which they are made, and we undertake no obligation publicly to revise any forward-looking statement in response to new information, future developments or otherwise.

With that, I'd turn it over to Mike McGavick.

Michael S. McGavick

Good evening. As you can see from our release, XL's first quarter results were solid across the board. We returned to profitability in the first quarter with fully diluted operating earnings of $0.52 per ordinary share and an operating ROE of 6.9%. Following a difficult 2011, where much of our progress was obscured by the high level of catastrophes and large losses, this is a gratifying announcement to make and further supports our confidence in XL's days and years ahead.

In my year-end letter to shareholders, I outlined several reasons for our confidence. I'll go through some of these again, updating them with our first quarter results. First, our underwriting is improving. And look, we're not confused, we are not at the level of underwriting results that we are expecting to show in every business, but we are improving. The insurance segment combined ratio improved to 101.2%, obviously higher than it should be, but significantly better than the 121% in the first quarter of last year. And even when one removes the extreme cat events of last year, we saw margin expansion in the insurance results in first quarter last year over this year, and we expect that expansion to accelerate. At the same time, Reinsurance continued their record of achievement. The Reinsurance segment's combined ratio for the quarter was 82.4%, a great performance. Jamie will give further details momentarily. It's a good sign that these improvements were especially noticeable among the 7 challenged businesses and insurance that we've discussed in detail on prior calls. In fact, the combined ratio of these 7 businesses was, in this quarter, 104.3%, getting closer in line with the rest of our insurance book in this first quarter. Again, nowhere near good enough, but as we expected, moving in the right direction.

Now in the P&C industry, we all know better than to expect an immediate turnaround in underwriting results. But as our actions take hold, improvements will accelerate, we believe. Everyday, these businesses are decreasingly affected by prior decisions and increasingly improving as a result of our corrections. As we've shared with you, some of these 7 businesses are already on their way to reaching appropriate margins. And at the same time, as we have emphasized, we are watching all of our businesses with intense focus, always on the lookout for anything that warrants special attention or greater opportunity to expand our profit.

Turning to another source of confidence. Pricing improved in each month of the first quarter. To use the metric that many of our peers report, North American Property & Casualty rate growth was 5% in the first quarter and rate achievement was accelerating throughout the quarter. I'll ask Greg and Jamie to elaborate, but we feel very comfortable that our positive rate change will continue. We are a long way from regaining the ground lost over the past 10 years, but as the momentum moves in the right direction, we believe XL is well positioned to benefit from this rate movement.

Another source of our confidence is our focus on smart profitable growth. Our P&C gross premiums written increased over 10% from the first quarter of last year. Insurance segment gross premiums written were up 9.3% as a result of new business initiatives in North American Property & Casualty lines, higher retention levels in our profitable professional lines, and improved pricing. Gross premiums written by our Reinsurance segment grew by 11.8%, primarily in International Casualty. We like what we are seeing, remixing our businesses towards premiums written in the lines we think provide the greatest opportunity for profit.

Another source of confidence is our ERM. Our enterprise risk management record continues to show results. While the entire industry did benefit from a relatively quiet cat quarter, where losses were reported, XL again fared in line with our expectations and performed well relative to peers as a percentage of shareholders' equity. Now in the first quarter, this was illustrated by Costa Concordia, an awful human tragedy obviously, and one of the true marine catastrophes that we have experienced. In fact, for the sector, this resulted in a loss approaching $1 billion. Now we're a leader in insurance and reinsurance marine coverages for both haul damage and liability. And for us to have a net loss from this event, currently estimated about $45 million, is a sound underwriting achievement given the catastrophe to the market. In the first quarter, we continue to invest favorable reserve development. And we believe you should find more evidence of our reserving prudence when we relieve our -- when we release our Global Loss Triangles later this week. Recall that the first quarter is an actual versus expected quarter. And as usual, we will again perform a complete review of our reserves in the second and fourth quarter, and look forward to discuss reserving in greater detail with you next quarter. Susan Cross, our Global Chief Actuary, will join us then.

As we made clear, our operating efficiency remains an area of intense focus. We are committed to ensuring that every dollar we spend improves our ability to expand margins. As people discuss, we are on track with the expense guidance for the year that we provided at the end of last year. But as I've said, we retain our ability to hold back spending of our expected loss ratio, driven margin improvement does not materialize. And we are just as committed to efficiently managing investors' capital. We bought back $100 million worth of XL shares in the first quarter. We've told you that we consider the $400 million in share buybacks for the year that we spoke of in our last call, as less a ceiling than a floor, and we intended to continue buying back shares for as long as the economics remain compelling versus other opportunities.

One final note on the quarter and I'll turn it over to Pete. At the annual RIMS Conference recently, I bet and I know you all follow, I was especially pleased by how often clients and brokers would take me aside to tell me how impressed they are, both with the talent we've been adding, and our already strong team and their creativity. These brokers of course follow-up by asking us to look at many of the most complex challenges, exactly the kind of position XL strives to be in everyday. We are driven to provide solutions that add value to our clients, while generating return on our capital for shareholders that invest in us. We have a strong edge -- or sense of urgency to succeed at both and we're pleased by the progress this quarter demonstrates.

With that, I'll turn it over to Pete to discuss the financials in more detail.

Peter R. Porrino

Well, thanks, Mike, and good evening. Operating income for the first quarter was $165 million or $0.52 per share on a fully diluted basis, compared to an operating loss of $163 million or $0.52 per share in the first quarter of 2011. Our net income attributable to our ordinary shareholders was $177 million or $0.56 per share. The loss in the prior year was driven by cat losses, which net of reinsurance and reinstatement premiums totaled $387 million compared to $20 million in the current year quarter.

Turning to our summary of financial results on Slide 3, you'll see the P&C premium growth that Mike highlighted. Our P&C combined ratio for the quarter was 95.3%, or 13.5 points smaller than the same quarter last year. Our accident year combined ratio was 101.3%, or 30.1 points smaller than the same quarter last year. As I mentioned, cat losses in the prior year quarter was significant and accounted for 30.5 loss ratio points compared to 1.5 points in Q1 2012.

Prior year development in the quarter was a favorable $80 million or 5.9 loss ratio points, this reflects favorable development of $54 million and $26 million in the Insurance and Reinsurance segments, respectively. Positive movements came from professional and property insurance lines, as well as shorter-tail reinsurance lines. As we pointed out in the past, the first quarter results do not include a full reserve review for the majority of our businesses. In fact, more than 80% of our reserves are not subject to a complete reserve review this quarter, and as a result, we generally react only to actual versus expected results in shorter-tail lines.

We continue to see positive actual-versus-expected development across most of our businesses. Professional lines releases of $24 million in the quarter arose primarily from a large favorable case settlement on a 10-year old claim. The current and prior year quarters were also impacted by losses from large, nonnatural catastrophe events in both Insurance and Reinsurance. In Q1 2012, this was largely related to Costa Concordia.

XL reported a loss net of reinsurance and reinstatement premiums of $45 million, of which $24 million was attributable to the Insurance segment and $21 million to the Reinsurance segment. Of the total Costa Concordia impact, a significant amount was in the form of reinstatement premiums and as a result, operating and acquisition expense ratios was somewhat distorted in the quarter. Excluding natural cat and PYD, our Q1 combined ratios were 104.8% for Insurance, 88.7% for Reinsurance and 98 -- 99.8% for all of P&C. Costa Concordia added 2.6, 5.2 and 3.3 points respectively to those ratios.

Our combined $282 million of operating expenses for the first quarter was up 8.4% or $22 million year-over-year. The year-over-year increase rose principally from costs supporting our strategic initiatives and higher compensation cost from both growth and headcount associated with new business initiatives and certain severance costs. This increase is consistent with the investments we have been discussing on prior calls and in line with the additional spend level we indicated last quarter.

At $190 million, net investment income under P&C portfolio in the first quarter was 6.4% below the prior year, due primarily to lower new money rates and cash outflows from the investment portfolio. The P&C gross book yield at the end of the quarter was 3.2%. We achieved an average new money rate on our P&C portfolio in the quarter of 2.1%. We estimate that approximately $3.2 billion of P&C assets, with an average gross book yield of 3.1%, will mature and pay down over the next 12 months.

Our net income from investment affiliates was $30 million, down $2 million from the prior year. The first quarter performance of the equity accounted alternative portfolio was above our return expectations and reflected the positive investment environment that we expected late last year and during much of the first quarter of 2012.

Realized gains were $21 million compared to realized losses of $66 million in the prior year quarter. This gain was net of $21 million in OTTI charges, which were primarily taken on non-agency RMBS assets. The total return on the portfolio was 1.5% for the quarter and contributed to book value growth with a positive mark-to-market of $249 million. This was driven by the narrowing of credit spreads which more than absorbed the impact of increasing rates.

The P&C duration increased by 0.3 years to 3.1 years, more in line, although still less than the duration of all our liabilities. The life asset duration declined by 0.1 years. Our fixed income holdings in Euro-zone countries is again listed in our financial supplement. We continue to have negligible exposure to the sovereign and financial institution data peripheral countries, and our Continental European bank holdings, including covered bonds, totaled $801 million and remain largely exposed and national champions Northern Europe. The net unrealized gain position on these securities was $4 million at March 31.

Now to capital management. Following the February Board of Directors meeting, we announced the authorization of a new $750 million share buyback program, which replaced the approximately $190 million remaining under the previous buyback program. During the quarter, we purchased in capital 4.7 million of ordinary shares at an average cost of $21.14 under the new program for $100 million, leaving 615 million remaining available for purchase under the current program.

And as we announced on our year-end call in January, 2012, we repaid at maturity the $600 million, 6.5% guaranteed senior notes.

With that, I'll turn it over to Greg to discuss our Insurance segment results.

Gregory S. Hendrick

Thanks, Pete, and good evening. I'm going to cover 4 topics tonight. I'll provide updates on the insurance segment results for the quarter and on the corrective actions we are taking in our challenged businesses, a review of talent changes and a summary of current market conditions.

Turning to results. I share Mike's sentiment that while our overall results are not where they need to be, I am pleased that we made progress this quarter. Insurance gross premiums written grew by $114 million or 9.3% in the quarter, and net premiums earned grew by $58 million or 6.6%.

Mike touched on some main areas of confidence and some of the big factors driving this growth. While I would add that we had success in 2 of our targeted growth businesses, international perimeter [ph] market and political risk, and in our marine book, driven by geographic expansion and rate improvement. I'll cover the overall pricing environment in a few moments.

The Insurance segment's combined ratio for the quarter was 101.2%, or 19.8 points better than the same quarter last year. Reduced natural catastrophe activity accounted for 13 points of this improvement, as Q1 2011 was adversely impacted by $133 million catastrophic losses compared only to $20 million cat losses this quarter. Prior year reserve releases of $53.9 million compared to $6.6 million last year accounted for another 5 points of improvement. In the current accident year loss ratio, excluding cats of 71.3% also improved by 4.3 points despite absorbing 2.2 points from Costa Concordia. And Q1 2011 was adversely impacted by several large non-cat property losses, whereas there was one large property loss this quarter. This marks the fifth consecutive quarter of improved accident quarter loss ratios.

These improvements are partially offset by a 1.4 point increase in acquisition ratio, partly due to reinstatement premiums related to the Costa Concordia loss, and a 1.2 point increase in the operating expense ratio, mostly due to increased compensation costs related to expansion in many of our businesses, an improved results, but we are still losing money on an underwriting basis which is unacceptable. However, the corrective actions we have discussed will begin to take hold. As you may recall, last quarter we talked about the businesses that we view as challenged. While this is just one quarter of progress, these businesses came into line with the rest of the book. Our combined ratio of the challenged businesses in the quarter was 104.3%, and the remainder we reported 100.2% combined ratio. Recall that last quarter, our challenged businesses combined ratio was 151.9% versus 104.4% for the balance of insurance. If we move the impact of prior development, cats and Costa, the Q1 combined ratio of the challenge businesses drops to 103.3%, while the remainder of the book reported a 101.9% combined ratio.

The leaders of these businesses continue to implement re-underwriting strategies to turn their respective books around. I'll now share some examples of the actions underway to how they have translated to progress this quarter. We are improving the management of our cat capacity, ensuring that it is allocated to those accounts where we can get the best returns. Not only have we seen our catastrophe exposures reduced at a faster rate than our premium base in our international property book, we've also freed up capacity on certain accounts on our North American property book, allowing us to increase the size of our portfolio without increasing overall cat exposure. We continue de-emphasizing the guaranteed cost workers comp business in our risk management portfolio, as it is lagged the rest of the book in profitability. Through the first quarter, we have canceled nearly 25% of the renewal business, achieved rate increases of 10% and increased the average deductibles by 11% on the renewed business.

In our surplus lines business, we continue re-underwriting the New York contractors' general liability line, where we have either non-renewed accounts or achieved rate increases of over 50% in the first quarter. We shift to the GL portfolio mix away from distressed areas, and we have successfully diversified the book in the other lines, namely real [ph] and property. The challenged businesses continue to be an area of great focus, but it's important to repeat that we moderate all of our businesses very closely.

Moving on to people. We were again pleased by our ability to add talent throughout this segment. This quarter, we appointed Jason Harris as Chief Executive for International Property and Casualty business group. We also added new talent in our political risk, international construction, and in marine businesses to name a few. As Pete mentioned, we did incur redundancy costs this quarter as we continue to replace underperforming talents. While we added 20 new underwriters in the quarter, the net increase was only 3.

And finally, a word on market conditions. The positive pricing momentum which began roughly one year ago is real and we believe sustainable. In fact, in Q1, we saw a positive rating indication in all of our business groups, including professional lines. And as Mike said, this return to gradual sustained rate improvement is something we've all been expecting and we feel we're well positioned to benefit from these market changes.

In North America, our P&C portfolio is up 5% year-to-date, led by double-digit rate increases in our property and E&S businesses. While our professional portfolio was just positive, our design business is up 3%. With our specialty portfolio up 1%, the only area of disappointment was in our international book which is almost flat. Despite 2011 loss activity and depressed pricing levels, we are losing business to competitors for double-digit rate reductions. While I'm always disappointed with the customer, many of the underwriting decisions we face in these situations are quite easy.

And while on the topic of rates, I want to be clear that we are thoughtful about how we implement rate increases. These are not blanket mandates which inevitably lead to adverse selection. Rather, our teams have segmented their portfolios based on a variety of factors and used a graded approach to rate change. In summary, the hard work of our teams produced progress in the first quarter, but we remain relentless in our pursuit of acceptable margins.

And now to Jamie to discuss Reinsurance results.

James Veghte

Thanks, Greg, and good evening. The reinsurance segment had a very solid quarter of underwriting results, with a combined ratio of 82.4%. Naturally, we had the benefit of negligible of cat activity compared to $271 million a year ago, principally from the earthquakes in Japan and New Zealand. Our reserve of leases in the quarter were $26.4 million compared to $64.4 million a year ago. The reduction was principally due to deterioration in 2011 cat losses, $10 million from the Thailand flood and $10 million from storm Dagmar in Northern Europe. Notwithstanding this, 85% of our releases came from short-tail property and marine businesses. Excluding the impact of cat losses and prior-year development, our combined ratio was 88.7% versus a combined of 87.7% in the first quarter of 2011. The deterioration from last year resulted from Costa Concordia, which had a net impact of $21 million or 5.5 loss ratio points.

Turning to top line. Gross written premiums in the quarter were $980 million, an 11.8% increase from the first quarter of 2011. This increase was virtually entirely driven by our European and Asia-Pacific operations. In Europe, we had a significant increase of premium assumed in a U.K. motor proportional treaty, select new casualty opportunities in London, and increased shares on Continental European cat business. In Asia-Pacific, we wrote new business and increased shares on property proportional business as that market responded to the non-cat activity in the region last year.

In summary, we had an excellent quarter of underwriting results on both an accident and calendar year basis. We found select opportunities to grow our portfolio, and we continue to maintain a very sound reserve position.

Turning to market conditions. The headline event at April 1 is the Japanese renewal. You will understand this will be a Q2 event from a top line perspective. Nevertheless, I would like to comment on the renewal, given the significant amount of intention this market has gotten over the last 12 months. As we've said previously, we had to significantly reduced our position in the Japanese market over the course of the last 10 years, as treaty conditions have gotten progressively competitive. While we would have liked to see more fundamental changes in the way the market is structured at this renewal, there was enough improvement that we increased our overall aggregates quite significantly. In fact, we increased them by 53%. These improvements included reductions in proportional ceding commissions of 3% to 4%, event limits on proportional treaties reduced by 30%, original rates increased by 25% to 50%, earthquake excess of loss rates increased from 15% to 50% and wind and flood rates came up 15%. Overall, it's a very solid renewal, although that marks overall rate adequacy still lags well below our U.S. wind portfolio. Our behavior in that market, including a very manageable loss from the earthquake last year, is a clear illustration of our underwriting discipline over the course of the decade of activity in that market.

Outside of Japan, I would echo Greg's comments on pricing. We're starting to see positive pricing momentum in sectors of the U.S. casualty market, particularly XL's liability in E&O. Cat exposed short tail lines are showing nice price movement and we would expect our U.S. mid-year wind renewals to have a continued momentum in a positive direction. We have virtually no business activity in Continental Europe at April 1, although we did renew a very large Continental European cat program with a risk adjusted increase of 6%, which we are pleased with. Elsewhere, Latin America remains very competitive and as mentioned, Asia-Pacific is showing an improvement in short tail lines as the market reacts to the national cat activity in the region last year.

So overall, we were very pleased with our quarter, both financially and relative to our underwriting activity. As we've said, we are ideally positioned to take advantage with what is clearly an improving environment with our global footprint, deep talent pool and long-term relationships with customers and producers.

With that, I'll turn it back to Dave for Q&A.

David R. Radulski

Shirley, can you please open the lines for questions?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Keith Walsh with Citi.

Keith F. Walsh - Citigroup Inc, Research Division

Mike, first question. You commented about underlying margin expansion is up and should accelerate. Can you talk to this a little bit more? What are you seeing in rate trend by month? And what do you view as your overall underlying loss cost trends?

Michael S. McGavick

Yes, I'm going to let Greg comment more on the rate trends by month because he gives you a little more insight there. But my point is that relative to the same quarter a year ago or relative to even the fourth quarter of last year, our combined ratios came down. And that is even more exciting when you get to the loss ratios versus the combined ratios because we did have some expense expansion through both the Costa Concordia and the noise it created as well as a headcount cost associated with growth as well as cost of some redundancies. So when you add all of that together, the fact that the loss ratio is moving the right way is the expansion I'm talking about. And I expect that to accelerate through this year, as I've said, leading to more attractive returns this year, and we think really getting exciting next year on our -- relative to this tough market basis. So we're excited about where the book is going and the kinds of underwriting actions that Greg describes will be critical to getting us on the right path. Now when we get into the kind of mid-single digits rate increases that we're describing in North America, we're beginning to catch up the loss cost trend and make some real margin expansion. That is not the level across the whole book yet, but as I said we expect this to expand and accelerate quarter-by-quarter as our underwriting actions take hold. So with that, I'm going to turn it over to Greg to comment a little more on what we're seeing on rate.

Gregory S. Hendrick

Sure. February, March, April -- each one had success of improvements. The figures I gave you in my comment blend over the portfolio to a positive 1%. And as Mike noted, if you blended the trend that we needed across our entire portfolio, it's somewhere between 3% and 5%. But clearly, it's a story amongst very different lines of business. In North America, the rate increases are north of 10% and accelerating on the short-tail line, and that is way in excess of trend. Conversely, while professional is positive just over -- just almost came to 1%, that's probably behind trend a little bit. So in summary, we're doing better each month-by-month, we're gaining ahead on the short-tail lines of trend and we're probably still lagging a little bit on the longer-tail lines.

Keith F. Walsh - Citigroup Inc, Research Division

And then Greg, just a follow-up on -- specifically on professional lines. You mentioned you're still probably a little below trend there, but your retention is actually up and you've written more, why not push rate more on that specific line if you could talk to that.

Gregory S. Hendrick

Sure. First of all, it's one of our more profitable books of business and so while we may be lagging trend, we still have very acceptable margins there. And the rate is very spotty. It's not a smooth -- it never is with any market. It's not a smooth 1%, and we're hitting on more of the tougher risks that we like -- than we are in the general spread of business. And so I would say the retention ratio being up is more business, hitting that mark than we did in the past. It's not a very large increase, it's roughly about 1 or 2 points up on the large professional book.

Operator

Our next question comes from Jay Gelb with Barclays.

Jay Gelb - Barclays Capital, Research Division

On the net-to-gross property casualty insurance written premiums, the retention rate went up to around 84.7% in the first quarter of '12 from 81.7% a year ago. I'm just trying to get a sense if that reflects XL more exposure net or if there's something out there.

Stephen Robb

I can comment on the Reinsurance side, Jay, that a lot of that delta is because we switched the heart and crop [ph] program from fronting where we ceded a lot out into the market to assume from the new owner and that dropped the ceded premium quite substantially.

Gregory S. Hendrick

Yes, on the insurance side, there isn't anything specific that comes to mind. You'll know, of course, in some of our bigger risk businesses there's a larger amounts of business that we fund for other carriers or for the captives of our clients. So there could be a little bit of noise in there, but not anything dramatic that I'm aware of driving changes in retentions.

Jay Gelb - Barclays Capital, Research Division

Okay. And then my next issue is on share buybacks. There was $100 million done in the quarter. There is $650 million left in the authorization. The debt-to-capital is down over 400 basis points just on one quarter when you repaid the maturing debt. So I'm just trying to get a sense of what kind of speed could we see the rest of buyback completed?

Michael S. McGavick

Yes, we don't -- as you know, we don't give forecast on the exact levels we'll be purchasing, and that's a source of constant dialogue with our board. But I can tell you, as I've said before, while we emphasize $400 million as something we were fairly certain of in this year, the reality of the way the market is playing out and the confidence we're gaining and seeing our margins expand lead us to be more bullish, as we've said. But in the end, we view the $400 million as more likely to be a floor than a ceiling. And you just have to take at face value and this is the kind of thing where given the effects it has on our subs, we let people know after the fact rather than before the fact what we do.

James Veghte

I would just add to that the debt to cap, that is pretty much exactly what we pegged it to be 6 months ago. So that's all according to long-term capital plan we had in place.

Jay Gelb - Barclays Capital, Research Division

Okay. And then my final one is on the Insurance segment. If you back out the Costa Concordia loss, the accident year x-cat combined ratio, we're still running around 102.5. Mike, to achieve adequate returns, where do you think that needs to be down to?

Michael S. McGavick

Look, I believe our accident year combine has got to come in around 90. I think that's just the reality of the back-of-the-envelope math of this low interest rate times. And that is really what we're delivered -- we're driven to deliver as an average across the book, that's how we develop our plans, that's how well we think the hurdle rates are now. You have to get into it business by business to get to an exact target for a particular business. But I think that's where this block ought to be running. This kind of low 90s, high 80s depending on the business. But we got a lot of work to do. But one of the things that is going to be hard as we go through this journey together, a couple of facts: One, it's not just rate change. I mean, as the markets harden, the first place that you usually get the most movement is on terms and conditions as much as it is on rates. Second, we're remixing the block of business towards more profitable activities. And third, we're reevaluating our lines shares and where to play in towers and all kinds of underwriting actions that aren't as obvious, aren't as directly related, but all of which we think have a meaningful impact. And if you take some of these more challenged businesses or some of our business that are more market takers and you make them less a part of the whole, and you take these kinds of less visible actions with real determination, you'll move a block of business like that. So that's not a forever statement to get into the 90s, it's just a lot of hard work.

Operator

Our next question comes from Michael Nannizzi with Goldman Sachs.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

So I just have a question on the Reinsurance business, you're at an 87.7% underlying -- but what kind of ROE does that translate into? I'm just assuming lower premium surplus there than for insurance, but just trying to get an understanding of kind of how adequate is that when you think about overall returns? And then just one follow-up.

James Veghte

It depends on what you use there. But I think if you use any form of economic capital or rating agency capital, it's certainly in the high teens.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Okay, great. And then thinking about the bad lines versus the not-so-bad lines, I guess, in insurance. I'm just kind of surprised that the range was so narrow between 103.3 versus 101.1. Is there something -- just trying to understand, what is it that makes -- like is the range within those groups wider than that kind of initial glance would indicate?

Michael S. McGavick

Yes. This is Mike. I'll start with a couple of things and I'll turn it over to Greg. First thing, if you look at that block of business, the entire insurance block, you got to divide it in essence into 3 segments: Challenged business which is about 1/4 of it, and then the balance can be -- we talked about this before, at our Investor Day last year. The balance can be kind of divided into half and half. Half of it businesses that we're really pleased with the results of, and that we would like to write more of that or somehow extend the advantage. And then businesses that are solid businesses, but they're at a very low point in their cycle, they are kind of market taking at this stage, we're doing the best we can to manage down their impact on results without our capabilities so that we can take advantage of the market as it returns. So you're going to get this real big spread of results. Remember also the Costa Concordia was in the sort of the good side of the ledger was where Costa happens, not in the 7. So you've got 2 would have narrowed in the spread between the 2. But if you look at the history of performance of the 7 and you look at this quarter, that's a pretty happy number. And one other frustration, I think, we're all going to experience is, when we break this book up into smaller and smaller segments and we talk about on a quarterly basis, we're not going to have -- we're going to have a lot of movements around because we take big limits and there will be pops here and there. The question for me is, over time, are we seeing evidence of our actions taking hold that are -- the overall numbers moving the right way? In this quarter, I'm pleased to say they are.

Gregory S. Hendrick

And Mike, I'd only add in that business that is performing well. There is new growth initiatives in there, where we're investing in future revenue and income streams. Construction, Surety, Political Risk, just to name 3 of them. So there's a bit of everything in that in the non-challenged part of the portfolio.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Okay. I mean -- so if I'm looking at the insurance -- so the underlying commodities we adjusted Costa is like 102 and change, I think I mentioned that before. And you grew that segment like 14%. I'm just trying to -- is the area where you grew the -- is that area exhibiting current underwriting profitability or are the areas that you see, where you see opportunities maybe not profitable now but you expect that trends will move in your favor as you grow those segments, those businesses out?

Peter R. Porrino

Mike, it's Pete. Let's me just start off and then give it back to Greg. What you're looking at is specialty is not -- so those are lines of businesses that we disclosed because that's the way that the market expect us to disclose them. That's not equivalent to our specialty business. So you'll need to -- we would need to draw you a map to try and reconcile those 2. So they are not all that comparable, but Greg you want to...

Gregory S. Hendrick

Sure. In general, Professional and Specialty where we have increasing retentions are where more the profitable businesses is located. And in our P&C business, where most of the challenged businesses were at lower retention levels than we were before. Those retention levels are following the margin opportunities that we see. Clearly, as you break each one of those down, there are differing levels of activity going on based on each business's -- and indeed within each business, each sub-portfolio's profit margin. So we're getting up to high-level number that are aggregating here. But In general, we're heading more towards the profitable businesses and away from the unprofitable.

Michael S. McGavick

And the other thing I would emphasize is some of it -- this is Mike, some of this cost will be affected by building up new activity. We have very acceptable loss ratios in the new business activities as we've discussed businesses like Political Risk and in Marine and such. But of course, there are subscale today and they're adding an expense burden that's affecting us all. But we like our timing of entry, a great deal given where those markets are going and we're liking what that capability does for the rest of our book.

Operator

Our next question comes from Brian Meredith with UBS.

Brian Meredith - UBS Investment Bank, Research Division

A couple of quick questions here for you. First, Greg, maybe you could tell a little bit -- a lot of companies have been talking about attritional kind of losses this quarter. Property losses were actually quite low. Did you all experience it all this quarter?

Gregory S. Hendrick

Certainly, in the quarter, there was the absence of large non-cat losses. And also, on pure attritional losses, there was nothing in there that we observed that would make us think that things are better or worse than prior. I didn't -- we didn't see any abnormally low.

Brian Meredith - UBS Investment Bank, Research Division

Great. And the next one for Jamie. Could you give us a little color on how you think that order is going to turn out and your capacity to write some more business down there?

James Veghte

Let me cover the last part first, Brian. As you know, we set our capacity based on shareholders equity as of the end of the third quarter of last year at 15% for our Tier 1 risk which includes U.S. wins. So that will be $1,570,000,000. As of January 1, we were at $1,358,000,000. That's Greg's book and ours combined. So going into the win season, we've got plenty of capacity to compete and we will deploy capacity. We are expecting continued great improvement. I would remind you, though, that, that market got sort of 10% to 12% risk-adjusted improvement a year ago as opposed to those that renewed at January 1, 2011, who basically were flat up slightly, so they paid a pretty good increase last year. I don't know what's going to happen, it's a highly syndicated market. My own view is it will go up, again, although probably about halfway levels we saw last year, and we will deploy. I can't tell you, though, that what we've seen over the last year is anything that clears the pricing of the major league markets will get done. There is plenty of capacity out there.

Brian Meredith - UBS Investment Bank, Research Division

Okay. And then one quick one for Mike. I'm just curious, the technology spend that's going on, that is increasing the expenses this year. I'm wondering if you could drill down a little bit exactly what is that technology that's going through? Is it under investing in technology or is it new stuff that's going through?

Michael S. McGavick

Yes, as I talked about back in Investor, let me emphasize a couple of points. I think the firm has chronically under invested in technology. As you know, the firm is basically built over time, much of it through acquisitions and much of the systems infrastructure was acquired in acquisition. And while I think that the people did heroic work keeping those systems functioning and supporting the business, in the end, as we envisioned the business over time, being more successful requires that we get that architecture stabilized and more uniform and more able to allow us to grow and gain operating leverage on adding new premium. So today, if we add a lot of new premium, we don't get much lift on the expense side. That's just ridiculous; we really ought to be seeing a lot of lift from adding premium. And that can only come by making this architecture more scalable. So you see things like really rebuilding the way in which our front-end underwriting tools work, both to make our underwriters more efficient with their time to give them more access to insight, to make better underwriting calls and to begin a flow of work that lowers the net cost of fulfillment for the client. That's one big area of investment, for example, right now. You know that we're investing a lot on the insight side of the equation, we have been for really more than 1.5 years now in terms of modeling, where we think modeling is applicable to the kinds of risk we take on. And again, the systems need to be substantially improved in order to allow that insight to be efficiently fed into the underwriting process. So I'm very confident in the end result of all this work and our ability to then really kind of add a booster to our progress. But as you know, systems work is a big intense effort, and it's not fun to finance, especially at a low point in a cycle. But we think it's the right time to be making the investment.

Peter R. Porrino

Brian, this is Pete. The only thing I'd add to put it in context of the increase that I spoke about, the majority of that would have been not in the technology space, it would have been in the compensation and related areas.

Michael S. McGavick

The strategic stuff we hold at corporate. That's the point.

Operator

Our next question comes from Greg Locraft with Morgan Stanley.

Gregory Locraft - Morgan Stanley, Research Division

Mike, just wanted to clarify, did you mention that the goal was a 90 combined on an accident-year basis?

Michael S. McGavick

If all economics stayed the same, our goal would be running around a 90. Now that -- I suppose I should be a little bit cautious. We are very prudent reservers and so sometimes I think the accident year at any particular time might run a bit hotter than the year will actually play out over time. But that's just a consequence to that approach. But I believe this firm needs to run in kind of in the low 90s, high 80s. Yes.

Gregory Locraft - Morgan Stanley, Research Division

Okay, great. So the mass on that is...

Michael S. McGavick

[indiscernible] the economic's change some, you can see a different result.

Gregory Locraft - Morgan Stanley, Research Division

Okay. So the math on that is more than $1 a share, it seems from current levels, just as -- as you run it through the model, if you achieve those goals. And so on the one hand, it's incredible if you can do it. On the other, I look at 20 years of data for the corporation and it's a level that's only been achieved in a handful of years.

Michael S. McGavick

Actually, it was achieved most of our early years and then very infrequently sense. But if you look at the history of large pops that we've managed to produce at XL that we think we've contained through our strategic redesign and our attention to ERM and all the rest, we don’t see any reason that we can't get that kind of stuff the heck out of the way and have our underwriters do their job. But we note that competitors are achieving the profit levels, it's not undoable and it's not out of sequence with our total history; it's just out of sequence with our recent history. But our determination to improve this book is very real.

Gregory Locraft - Morgan Stanley, Research Division

Okay, and that includes -- I mean, you think the march towards that level is -- obviously began this quarter and just continues in the quarters ahead and years ahead?

Michael S. McGavick

Well, actually, as Greg reported, that's the fifth consecutive quarter of improvement on the loss ratio which is what we're focused on. That's the main driver we've got and then as we get these investments done, we'll be able to add in the booster on expense, too, we believe.

Gregory Locraft - Morgan Stanley, Research Division

Okay, perfect, perfect. And then just jumping to another key lever is the investment yield, again in the commentary, it doesn't sound like that --I mean it's just an unfortunate reality that where yields are, there's no movement or ability to re-risk the book or get higher yields. It sounds like that's going to just continue to be a headwind in the model, the combined ratio is the real kicker, that's where we're going to see the ROE much higher over time.

Michael S. McGavick

Yes. This is -- We are underwriting loss ratio focused. I mean that is the driver around here. No question. Now on the investment side, I wouldn't say that there is no ability to, there's just no want or desire to. We like being middle of that pack on the investment side. We've chosen this defensive position. We believe in the current market conditions justify it and you'll see relatively modest movements in line with how the market conditions involved. We're not going to be heroes there, we intend to be the kinds of underwriters we historically were. And it's not as though there aren't pockets of us that show us what we can do. We have businesses that are operating at this level today. And our Reinsurance business and a number of our Insurance business are achieving these kinds of levels. It's just about making the expectation and reality that the whole firm is doing.

Operator

Our next question comes from Vinay Misquith with Evercore Partners.

Vinay Misquith - Evercore Partners Inc., Research Division

On the 7 underperforming businesses, just curious as to what the targeted level of combined ratio is, you've done a great job of moving it down to 103.3, but is the high 90s or is it just 100 combined ratio the target? And when do you think that's achievable by?

Michael S. McGavick

Well, Vinay, first, we have given explicit forecast on subsets of the business. We've said that over time, we believe will see this year that we'll see margin expansion. Next year, we'll see more exciting results on a relative basis, given where the sectors stand. I stand by that and believe we'll deliver that. A big part of how you get that, Vinay, is getting these businesses to stop beating you in the head. It's impossible to get there when some of these businesses produce such unreliable and often terrible results. And the businesses are working hard at it. How fast -- but what's a rule of thumb? A rule of thumb would be it takes 3 years to turn around a commercial book of business. I mean that's a good rule of thumb to work with. But we didn't start yesterday, we started back at the end of the strategic planning cycle back in '10. Some businesses got more attention quicker, others took longer. We discussed this in detail before how we went through our various review. So they're at an uneven state, each one of them, relative to the speed of turnaround. But I expect this speed of turnaround now to get a little wind behind its sails due to what's going on in rate generally across the market, which is long overdue and well justified by the economics of the business today. So I'm -- I feel encouraged about the work we're doing. I see the steady progress. We have all the short-term metrics you can imagine to make sure everybody's doing what they said they will do. And I feel as good as you can feel when it's moving the right way, but not as fast as you would like. And we'd like it to move it faster and we'll keep working towards that.

Vinay Misquith - Evercore Partners Inc., Research Division

Sure, fair enough. Second question was in numbers or question I think in the Costa Concordia loss. Could you please give us a breakdown between the impact on the expenses and the losses of price segments, please?

Michael S. McGavick

The billing statement premiums, by and large, it went in 2 different ways for reinsurance and for insurance. Insurance reinstatement premiums ended up costing -- yes, for insurance, $13 million and for reinsurance, it was additional of $5 million. So you can run the math through that.

Vinay Misquith - Evercore Partners Inc., Research Division

So it was a positive $5 million for reinsurance...

Peter R. Porrino

And negative $13 million for insurance.

Operator

The next question comes from Joshua Shanker with Deutsche Bank.

Joshua D. Shanker - Deutsche Bank AG, Research Division

Two questions. The first one, you made the comment initially that the reserve release related to the quarter were not related to an annual reserve analysis but just quarterly truing up, I suppose. I looked historically, and I don't really see a pattern of the annual reserve study making much of a difference in how you release reserves, can you sort of go into why you made that distinction? What the distinctions are and how you analyze your reserves quarterly versus annually?

Michael S. McGavick

Yes, the quarterly, again, is just we take a look at the actual versus expected and where there are and focus on the shorter lines. Where there are unique anomalies, where something is simply manifest and time to react to it we will deal with it uniquely. The reason we emphasize it in this quarter is there was one such unique event which drove a larger than we would usually expect movement out of the professional lines relating to a 10-year-old claim that was resolved during the period, and we felt at that point, we could have waited if you want to follow the model that we use perfectly but we felt that it was simply manifested and should be dealt with. That's why called out the distinction. And again, you're going to get a really good picture and the ability to get all deep in the data when the Global Loss Triangles come out here next week.

Gregory S. Hendrick

So Josh, just to clarify, it's not annual. It's semiannual where we do the full reserve review.

Joshua D. Shanker - Deutsche Bank AG, Research Division

Okay. And the second situation, you mentioned the international casualty growth depending on where that is and what you're looking at the market. This is reinsurance, of course, although we see casualty growth in insurance as well. International casualty markets don't have the same kind of optimistic maybe as U.S. casualty markets. Can we sort of draw some distinctions on where it is exactly that you like the business there compared to what others might be saying about those international casualty markets?

Gregory S. Hendrick

Yes, the growth in our international book has principally been over the last couple years on the U.K. motor market, which is very substantial rate increases, although we would admit they're slowing down now. Elsewhere, you're correct, it's a fairly competitive market.

James Veghte

And I think you also need to be a little bit careful when comparing growth in our reinsurance book from our insurance book, where our transaction count is much lower than Greg's would be on a regular basis. So you could get distorted growth or reduction numbers based on 1 or 2 Underwriting actions.

Gregory S. Hendrick

On the insurance side, the international casualty growth came in some very targeted activities, typically geographically in Germany. The book renews predominantly at 1 [ph]. So there isn't necessarily any need to project that through the rest of the year. This is a one-one book of business and we were successful in targeting some new customers that we wanted, that we wanted to pick up.

Operator

Our next question comes from Matthew Heimermann with JPMorgan.

Matthew G. Heimermann - JP Morgan Chase & Co, Research Division

A couple of questions. First, I was a little surprised that when you're talking about professional lines, you seem to conclude [ph] to having more business at your hurdles and large account. Can you -- did I hear you right? And I guess any specific industry classes that's happening? I know there's been some capacity withdrawals so I was curious if that's playing a role in that, too.

Gregory S. Hendrick

It wasn't -- Matthew, it wasn't so much large as difficult, it can come in a variety of sizes. There's nothing that I am aware that would make me think anything industry-specific happening in that book of business. It's more just we've found a few risks that with our somewhat contrarian view, we have thought to hit the hurdles and have written them at a little bit better clip than we did the year before. Again, I want to emphasize this is not a dramatic, large increase but an incrementally increase.

Matthew G. Heimermann - JP Morgan Chase & Co, Research Division

Okay. And then Jamie just -- with respect to Japan. I guess not a surprise that, that book isn't as rate adequate as your U.S. book, but just be curious how you think the Japan portfolio compares to Europe now?

James Veghte

I would say very close to Europe the way we calculate rate adequacy levels. I won't tell you, I won't go through the entire calculation, but it has moved from sort of a high 70s to the mid 90s, and I would say euro win this probably about the same level and U.S. win the way we calculate it is about 108 to 110.

Matthew G. Heimermann - JP Morgan Chase & Co, Research Division

Okay, that's helpful. And then just one clarification for Peter. You had mentioned for Costa Concordia, was the only impact on the acquisition and expense ratio is broadly just the reinstatement premium factor, was there some ceding commission going through there as well?

Peter R. Porrino

No, the reinstatement premium, that will be both on the driver on the commission and brokerage as well as the operating expense ratios.

Operator

The next question comes from Doug Mewhirter with RBC Capital Markets.

Doug Mewhirter - RBC Capital Markets, LLC, Research Division

Two questions. First, obviously you bought a fair amount of shares back this quarter. I noticed the diluted share count didn't respond as proportionately as I thought. The diluted share count was sequentially -- only went down by about 2 million. Is that a function of the stock going up a little bit and more options in the money, or is there any residual from many of the shares that are converted or anything like that?

Michael S. McGavick

I'm going to hand it over to Steve, but it was in the dilution calculation. Do you want to just go through that?

Stephen Robb

Yes, it will be options on restricted stocks that have a more diluted effect. I'd have to go back and look at when impact of the conversions of the reinsurance [ph] they were the last -- primarily, the last quarter. So it's mostly just the dilution impact.

Doug Mewhirter - RBC Capital Markets, LLC, Research Division

Okay. My second question is, I guess, a little bit more conceptual. I know a couple of quarters back, you were commenting on some actuary lines which you thought were actually historically excellent, very profitable lines with 10-year combined ratios of 60s. They were going through periods where the combined ratios run the 90s and the 100s because of a few large losses here and there. And this is Casualty and Property, it's not necessarily -- large property losses could be anything. And it's almost like there is a luck -- a big luck factor involved in any given quarter. How do you think this quarter would be characterized in terms of that factor, where a good line might have had unusual string of losses and a bad -- or a bad line or a challenged line, as you would say, might have had an unusually good string of non-losses, for lack of a better term.

Michael S. McGavick

I think that's a very interesting question. Let me give you a little perspective in the line that comes to mind the most, by far the most which is International Property. I think it's true that 3 years ago, in '08 for example, we were talking a lot about large pops, that there was an unusual level of large loss activities. I don't think we were the only ones talking about it. The market was talking about it, too. And I -- and we did talk about how -- if you looked over 10 years, these had been very profitable lines, and we were confident that this was an aberration. But you may remember us being very direct in our disappointment the more we study these lines as the large pops continue. And we felt that the underwriting in this business on deeper examination did not justify the confidence that we have placed in them or the defense that we had made to them 3 years before. And we were pretty candid about that, and I'm trying to continue to be candid about that. Not of our standards. So we really have torn into those books in a very rigorous way using resources from all over the company to try and get at what we think is going on, and how to improve it quickly. And while we'll -- given the kind of large lines, complex risk strategy we have, given the fact that we're not a shop that has large blocks of kind of commodity business around, we will have some more volatility perhaps and others, but I think the level of volatility that XL has been seeing is unreasonable to the size of the blocks of business. And so we have been using a variety of underwriting tactics and other tactics to lessen that volatility. So I just want to give you that thematic comment. With respect to this quarter, I'd say that in general, this was a more favorable quarter, certainly than the kind of stuff that we were going to last year. But every time you say that, you have to say, well, except for Costa Concordia, a true marine catastrophe and happens, marine is a business that were a big and leading player and want to be a leading player in giving results over history. So if I were to characterize the quarter, it was more favorable than what we've been seeing. Certainly less influenced by the kinds of things we were seeing out of International Property. Would I claim that's all because of Underwriting actions at this stage? No, it's too early for them to all have taken hold. But we would expect over time that it's less and less likely we'll see those kinds of pops because there is less and less opportunity for the kind of practices that were in place before to be influencing the book. So interesting question, and I hope that's responsive.

Operator

Our next question comes from Josh Stirling with Sanford Bernstein.

Josh Stirling - Sanford C. Bernstein & Co., LLC., Research Division

We appreciate all the color around the underperforming businesses and the initiatives that are going on. The big question I'd ask is big picture, Mike. If the underperforming business is relatively converging with your better business, and I want to recognize it, it's skewed by Contra Costa -- Costa Concordia, pardon me. Just actually, literally, do the math. The question I think is longer term, how much of the improvement you're targeting are you really hoping to get from these underperforming businesses? And how should we think about, I guess, improvements in these businesses versus, say, just broader mix initiatives that you're talking about improving the mix and more property -- or some of these other lines that you're growing? And then just, generally, sort of broad industry pricing and broad repricing at your book. When you think about the weights of those 3 things, how should we be monitoring them> And generally and I wonder if you could give us some targets for us to think about it over the next couple of years.

Michael S. McGavick

Yes, I'm going to disappoint you on targets by that level of granularity. I think that gets me too close to the forecasting business, which we try not to be in, except where when we think there's very controllable things we can talk about such as expenses. So as I look up, let me give you a few flavors. First of all, as rate accelerates, it's going to be an obviously bigger part of it, but it changes where you think of your improvement coming from. The fact that we're now seeing positive rate in some of the Casualty business for the first time that we've seen it is one of the biggest positive indicators I can point to. When you have a very large book of already meaningfully profitable business like our professional book and you start to get some positive rate into it as well, that's a very encouraging fact that prevents the margin there from being hollowed out while you work on the rest and that is a very large portion of our block of business. When you look at the underperforming, which is kind of a quarter of our business, when you start to pull that thing into the 90s, which we are believing we can do at reasonable pace, you then really have taken away one of your biggest deadweights and you turn it into at least at that point, benign. You take those together and you've got about half the book described. You add in specialty businesses, which are performing well by and large. You add in the reinsurance book that continues to provide very good combined. And then you're down to the kind of the portion that is kind of in the market taking phase where we still like the business, and there it's about being very assertive on pricing, doing what we can and not losing our capability for when the turns come. You add all that together and it doesn't -- I think you can see that rate isn't the whole focus. What we can do on those market taking business is every bit as important. Every new dollar of earnings we get there is every bit as important as what's going on in the so-called challenged business. And believe me, somewhere during this year, if things go as I expect, we're going to stop talking about this breakout because it won't be relevant anymore. It will be about how the whole book comes together. But when you have something hurting you as bad as -- what was it, 150 or some ridiculous number on some of these challenged business last year, it really gets your attention, you realize that, that just can't happen, that kind of so-called bad luck is not bad luck, it's not quality underwriting and you've got to get your arms around it. You take out that kind of beating your head on the rock and you can really get this book moving. So there's no -- every dollar of added earnings is valuable no matter where it comes from. And as we get these kind of more aggressive actions completed in these underperforming business, then it's the usual soft market stuff, remix to the more profitable lines, maintain your capability, push rate, explore rate, see what you can do, manage your loss cost as best as you can and you'll come out of it. Sorry that that's not the specific forecast by 3-part division that you want but that's how it's going to happen.

Josh Stirling - Sanford C. Bernstein & Co., LLC., Research Division

That's fine. I guess, the final question, that you guys have been in front of some of these issues are certainly related on your own book, but I think it's sort of publicly so. I'm wondering how over the past 6 months sort of -- the tone of this conversation has shifted at conference like RIMS and even in dealing with some of these troubled businesses. We have had to have a lot of tough conversations with these brokers that you have to have big, broad relationships with. Is the market coming to you? And do you think that maybe there is some momentum for taking more pricing in some of the market taking in the price-taking businesses as well?

Michael S. McGavick

I really do, I -- the market -- look, this is not a big, radical, sudden hard market. This may be that long-awaited slow appropriate turn that the market has long thought would be great, where we don't just see sudden disruptive events for clients and instead, just a rational conversation towards pricing levels that are acceptable. And as we talk to brokers, their attitude is generally very supportive. I mean, every once in a while on the reinsurance side, we'll see someone put out a study about capacity. But generally, we're on the insurance side, people know that the game has to change. They know that there is a reality to these low-interest rate environments. They know that there is a reality to many companies, I think, increasingly finding their reserves less pull some [ph] and as that plays out, those of us who've been more prudent, those of us who have been more cautious are in a good position. And the brokers understand that. They're seeing more rate-driven behavior, I think by competitors. And as a result, they are, I think, generally very supportive. We've certainly have no big disruptive conversation with them. Occasionally, if you get into some subclass when there is a program involved or something, they'll be a very, very unpleasant conversation. But that's really rare.

Operator

Your next question comes from Randy Binner with FBR.

Randy Binner - FBR Capital Markets & Co., Research Division

I was hoping to get some color on the PYD that happened in P&C and reinsurance, specifically looking for color on what business lines stood out there and what accident years drove the favorable development?

Michael S. McGavick

Well, the -- overwhelmingly, it's the short-tail lines and recent years that we would recognize relatively quickly. So that's the heart of the story. There are couple offsets, as Jamie mentioned in his remarks, about 10 million associated with New Zealand earthquakes where there was some adverse development, some adverse on Dagmar, the Northern European storm. You got offsets, you got short-tail lines, otherwise, being released whether it wasn't -- and then you have the one big one that we're calling out specifically that otherwise wouldn't have been addressed in this quarter it being an A versus E quarter, which was a -- Professional lines loss one client where there was a big settlement and it's from 10 years ago, if I remember the accident. But that's what's driving all this, it's really recent years, short-tail reaction.

Randy Binner - FBR Capital Markets & Co., Research Division

Thanks for bringing all that together. And so I guess kind of '03 to '07 liability redundancies, are those pretty much faded at this point or have those have been realized?

Michael S. McGavick

I think, next week, you're going to hit the Global Loss Triangle. That's going to be a good place to study that, you want to study carefully because there is always noise of this large event to that large event, you want to get to the underlying trends, so study carefully. But you're going to find, I think, well -- we'll let those speak for themselves and talk about it next quarter because next quarter is when we get the in-depth reviews from the entire book, and that's where we could give you more color on that.

James Veghte

I can tell you, Randy, that by class, this quarter, 16.2 part of the 26 was from Property and 7 was from Marine. So very much for short-tail relief [ph].

Operator

Your next question comes from Meyer Shields with Stifel, Nicolaus.

Meyer Shields - Stifel, Nicolaus & Co., Inc., Research Division

Two quick ones. One, is there any reason why the first quarter interest expense shouldn't be a good run rate for the rest of the year?

Michael S. McGavick

Well, I'm sorry, could you repeat that?

Peter R. Porrino

The answer is no. It should be reasonably the same. I mean, there's a few days of extra interest on the debt that we retired so that, that would be about it.

Meyer Shields - Stifel, Nicolaus & Co., Inc., Research Division

Okay, Mike. The question was whether the interest rate...

Michael S. McGavick

We got it. Pete just listens faster than I do.

Meyer Shields - Stifel, Nicolaus & Co., Inc., Research Division

Second question just with regard to life re, is there any long-term planning going on right now? It looks like the ROEs on an annual basis are low single digits?

Peter R. Porrino

I'm sorry, is there any kind of what plan?

Meyer Shields - Stifel, Nicolaus & Co., Inc., Research Division

Long-term adjustments?

Peter R. Porrino

So we will -- for the life reinsurance book, as we said before, we put it in run off, we would, at the right price -- I mean, we said we would sell that business. The returns -- you have to be a little careful coming up with ROEs. You can describe different levels of capital for that business, right. In fact, if you look at our economic models on the floor-wide [ph] basis, the returns are actually reasonably strong. The business has been pretty consistent over time. Right, so we're happy to -- we're happy to hold it but we'll be happy to sell it at the right price.

Meyer Shields - Stifel, Nicolaus & Co., Inc., Research Division

Okay, there is nothing, no updates, I guess, is the right way of asking you.

Peter R. Porrino

There is nothing that has happened in that book of business to the last several quarters.

Michael S. McGavick

Given that, that block is what has us talking about long-dated European financials, which are, as we mentioned, in the national champions in Northern Europe, but that's the block that's causing us to have that portfolio. You can guess that the likelihood of something stepping up to that, given the uneven news that we continue to experience from Europe is relatively slight.

Operator

And our final question is a follow-up question from Michael Nannizzi.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

So I guess one question I had is just on the kind of businesses that you've invested in and talent over the last year or so. And kind of what was your baseline expectation for the market overall pricing, those lines of business? And what's your kind of runway as you look out and if conditions change or if they don’t meet your expectations for maybe to reverse course in some areas where maybe you don't see the growth or opportunity that you saw when you made the decision to ramp up?

Michael S. McGavick

Good point. First of all, we didn't enter any business where we didn't think there were adequate returns at the point we were entering the business. So none of these were on comp. We thought that there were adequate returns available if we could find the right talent. In terms of loss ratios from Day 1, combined ratios take time because you have to build the book to the size to absorb the cost, so that's all obvious and it will take time. I don't -- I can't give you a precise -- because it will be very different by line of business. I mean Surety can grow very fast for the couple of writings and you could be in great shape then, Surety doesn't cost us very much to begin and I'd really love our guys. I'd be willing to take our time and let the market work out. So it would be a different answer there that it would be on Political Risk where we've made a pretty substantial investment. We like that marketplace right now with all the uncertainty in the world and the quality of our underwriting team. But I do expect them to get going. And they're under pressure and they should be and we're very careful in monitoring very carefully how they're allocating their risk. So you really got to go business by business. I can't give you a real rule of thumb. I think Greg want to add a little color, and I'd like him to.

Gregory S. Hendrick

The piece on talent, too, is the big component can be also the replacement of leaders that we need to replace to be effective at turning around some of these challenged books of businesses. They can't underestimate the impact of a strong leadership, and Mike and I saw the firsthand of RIMS with a couple of different challenged business where a new leader not only energized the marketplace -- I had people pulling me aside to tell me what a great hire it was, but also how they have observed much better response and actually with the remaining team. The other part of it is there's talent being added in existing lines of business, for instance, North American property where it's a very, very easy metric to watch. How much premium you're getting per underwriter and what kind of returns you gain in the pricing. So not all of this is new business additions.

Michael S. McGavick

And then there is probably one last thing to add, is really talented underwriters have a greater utility than just narrow business activity of their own line of business. So we will have cadence where the talent come in, we'll work at the business. We may, in the end, decide that isn't working out like we thought but here is something else you can contribute to this place. And we find that having a community of talent where underwriting talent is what we celebrate, what we try to drive everyday, supported by world-class insurance professionals in every discipline, this is what makes the place fly, and that's why we've had such success as people sense that this is a unique point in XL's history where there is an increasing excitement among that community. And they're being treated in a way that they perhaps haven't experienced in their other places and they just realized they are a part of something special. And we intend to make this a great home for that kind of entrepreneurial, exceptional, complex risk underwriting talent. And we're seeing people -- our doors are knocked on all the time, and we're excited about that.

Operator

I'll turn the call back over the speakers for closing remarks.

Michael S. McGavick

I don't think I can give a better closer remark than I just did. This was and is becoming again a very special place. We are proud to be a part of it, it's not easy, we've got a long road to hold between where we stand today and our aspirations. But we're driven to bring that to life as quickly as the economics of our business rule out. So thanks for all the time, and we appreciate sharing our story with you.

Operator

Thank you, and this does conclude today's conference. We thank you for your participation. At this time, you may disconnect your lines.

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